How to Know if You’re Doing Well Financially
I recently Googled “financial benchmarks for performance” and found quite a few rules but none of them resonated with me:
You can measure your net worth against your parent’s at a similar age
You can compare how you’re doing compared to your peers (but that’s just a guess)
You can check in with the cost of your car. Your car should only be 1/10 of your annual income. So if you own a $30k car, you should be making $300k per year.
You can check in with your housing costs. Your house purchase should be limited to 3X your annual gross income. So if you own a $600k house, you should be making $200k per year. And if your rent is $2k per month, you should be making $6k per month after taxes.
All of these are helpful guidelines but they don’t really answer the question, “How am I doing financially?” And even if there was a test where we could get an A+ in our personal finances, would that tell the whole story?'
There’s no standardized way to calculate how you’re doing
The first pill to swallow is that there’s no definitive way to ever truly know if you’re doing all the right things.
Generally, if you spend less than you make, your net worth grows over time, and you can afford to take care of your needs, then you’re doing a great job.
Beyond that, it’s hard to know what the opportunity costs are for doing one investment over another or making one financial decision over another.
Personal finance is called “personal” for a reason
Financial success is different for everyone.
A few years ago, I went on a first date and he told me a story that I’ve never forgotten.
He helped manage the finances of a few wealthy people who live in Lake Forest, IL. One of his clients lived in a mansion, and as a couple, they made $1M per year.
They also spent $1M per year.
Their life on the outside looked incredible, but when one of the partners unexpectedly lost their job, they went to their finance team to discuss their options and were shocked to learn that their only option was to start selling their home, boat, etc. They had no idea they were spending every penny they made.
Everyone desires a different lifestyle, and every lifestyle requires a different financial level. Most important: one level is not better than the next.
This is about what feels good for you.
It’s hard to tell how things will pan out in the future
Financial success is not a fixed item on a checklist; it can change at any time.
For example, securing a job with a lucrative salary is a huge accomplishment, but it’s also not a sure thing forever. And putting aside money is generally the smartest thing you can do, but we also have to trust that the funds we are choosing will pan out over time. And last, there are things like illness and divorce that can completely sidetrack progress (more to come on prenups soon).
One thing I know for sure: if your ego is tied to your income or money, then you’re probably tying it to the wrong thing.
The economy, inflation, and job market all ebb and flow.
I don’t say this to scare us. I actually believe it’s helpful to know that our financial situations are not set in stone. It encourages us to stay humble, live below our means, save for a rainy day, and protect our assets. It also reminds us that financial opportunity is right around the corner…
Money is a creative medium
Finance is not just a numbers and math game. It’s also a mindset and creativity game.
There are endless ways to make, save, and invest money. Nothing is set in stone, and there is endless opportunity for all of us.
Next steps
I wish I could hand you a quiz, give you a gold star, and send you on your way, but I don’t have a true way to gauge how we’re all doing.
But I do have a reminder:
Your financial situation is personal to you.
Comparison doesn’t get us very far, especially when finance is a lot of smoke and mirrors. One person might own a fancy car because they have a $10 million dollar family trust. Another person might own a fancy car that they truly can’t afford and have no retirement money. The fancy car itself is not a symbol of success. Net worth by itself is also not a symbol of success.
The best we can do is:
Create our own financial guideposts for success
Focus on our values
